A blog discussing current economic news and events though a political perspective.

Wednesday, October 1, 2008

As the Bush, Paulson, Bernanke and crew scramble to make another attempt at passing a bailout bill,one wonders why passing the risk and potential reward (unlikely, that) of these mortgage-based assets to the Government would solve the problem.

Yes,the U.S. Treasury has deeper pockets thanprivate parties.But with a 350B$ price tag,or 700 B$,even the U.S. fiscwill have indigestion.Ifthe assets can only be liquated by the Treasury (or by as-yet-unnamed fiduciary) at a steep discount from the purchase prices,the shortfall will be monetized in deficitsthat will exact the cost from the economy.The burden of the bad assets will be only shifted from the current mortgage-based asset holders toother shoulders.

How the bailout might work to the benefit of all?First there is the considerable benefit of remaking a market for these assets again….even ifthey must sell at a loss.

Next would be by avoiding (or quelling) a panic.The panic avoided would be the overreaction by the markets to the souring housing market and the mortgage-derivative securities.